June 24 2013 - Markets Slide on Fed Announcement

Last week was a turbulent one for equity markets. Key indices slid following Wednesday remarks by Fed Chairman Ben Bernanke, signaling that the Fed may scale back monetary stimulus later this year. For the week, the S&P 500 fell 2.11%, the Dow lost 1.8%, and the Nasdaq trimmed 1.94%.[i]

As expected, news from the Fed dominated markets last week. Equities started the week with steady gains, suggesting that investors expected mostly reassuring words from the Fed. However, Wednesday’s official FOMC announcement and subsequent comments by Ben Bernanke pushed markets to session lows. The Fed chairman stated that, should economic conditions improve, the central bank could reduce the pace of bond purchases this year and potentially end the quantitative easing program entirely by mid-2014. He also said that economic conditions appear to be improving, suggesting that downside risk to the economy from tapering off quantitative easing programs may be low.[ii]

Recent economic data supports Bernanke’s optimism. Home resales reached a 3-1/2 year high in May and regional factory activity rebounded in June, suggesting that the economy has some momentum behind it.[iii] While government spending cuts and higher taxes stoked fears that the recovery might stumble, it appears that the economy is still chugging along. Weekly unemployment claims rose 18,000 last week to a seasonally adjusted level of 354,000. The four-week moving average, which is considered to be a less volatile measure, increased to 348,250 – a level economists usually associate with stable job gains.[iv]

In the weeks and months ahead, it is likely that Fed policy will continue to drive a measure of volatility. Even so, economic trends are showing modest improvement, and markets don’t rise in a straight line. Volatility is a fact of life, and short-term declines may present opportunities for value investing. We will continue to keep our eyes open for both risks and opportunities with the potential to affect our clients and will keep you informed.

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

The Nasdaq is a computerized system that facilitates trading and provides price quotations on some 5,000 of the more actively traded over-the-counter stocks

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